How global growth surmounts new challenges?

On September 1, 2006, China?s National Bureau of Statistics raised its estimate of growth in 2005 to 10.2%, up from the 9.9% preliminarily indicated. The stated policy of cooling the economy notwithstanding, with first half growth already over 10.5%, it should not surprise if 2006 yields a second successive year of double-digit growth in the Middle Kingdom. Japan appears to be set quite firmly on the path of a revival, with growth in the first half of 2006 averaging 2.8% and most indicators, including inflation, quite positive.

The Euro-zone showed a burst of growth in the second quarter of 2006, coming on top of a better-than-average first quarter. Thus, in the first half of 2006, Germany the largest economy in the region registered average growth of over 2%, fixed investment as up by 4.4% and both exports and imports grew by more than 12%. The French economy soared by 4.5% annualised, in the second quarter of 2006 compared to the first, and seems to have averaged well over 2% growth in the first half. Overall the euro-zone grew by an average of 2.2% in the first half of 2006, while the larger EU-25 community expanded by 2.4%. And as for the aggregate, so for the component members too, the second quarter was better than the first. This expansive pace has brought the unemployment rate in Europe to its lowest levels in years. The US economy did slow somewhat after a very strong first quarter, but the average for the first half of the year was still 3.7%.

The continued rapid expansion of the world economy is happening in an environment of unprecedented and unexpected very high price of crude petroleum and somewhat more expected continuing tightening of monetary policy and increase in interest rates. Headline inflation, although high by both historical standards and the magnitude used for monetary targeting, has been offset by little apparent contagion to manufactured goods and services. Along with crude oil, other crude minerals and many farm products, particularly meat and high value fruit & vegetable produce, have also seen their prices rise dramatically. Yet general prices have not quite caught the proverbial fire.

It has been common in recent years to associate a putative decline in growth with increase in the price of crude oil. In late 2000 the International Monetary Fund (IMF) set out some relationships: An increase of US$5 per barrel in the price of crude would, they said, knock out some 0.30 percentage points, i.e. 30 basis points (bps), from potential growth. It would be likely to be higher at 50?60 bps for industrial countries and in the developing world ?it would be largest in Asia, where there are relatively few oil producers?. For India the computed impact was 50 bps of GDP; for China 40 bps and for South Korea a whopping 90 bps. In 2004, another research paper of the Fund concluded that the impact could be twice as large.

The $5/bbl idea, perhaps because of its beguiling simplicity, became part of the urban legend. Those who would decline to play by the framework of this legend suffered the condescension often granted to the merely ignorant. However, the Fund?s mis-peregrinations aside, the question certainly remains as to why the world economies have gone their merry way, despite the spectacularly high oil prices and the heavy burden of the theoretical laws of economic cycles. Not to mention the growing global club of jehadis whose idea of paradise is all about blowing themselves up, along with as many other unfortunates who happen to be in the vicinity. Nor authoritarian regimes who like to play chicken with nuclear weapons . Nor the fact that the world?s only hyper-power is capable of precipitate, misinformed, and misconceived action. Incompetence, I suppose, is no characteristic of under-development: the more powerful one gets, the greater the hubris .

Certainly one part of the answer to the question of the resilience of economic growth, is the enormous impetus to the aggregate world economy being provided by output expansion in China, India and other emerging economies. Greater supply of goods and services turned out by millions of workers, whose wages measured at market exchange rates, lag their productivity. In a sense by fundamentally enlarging the scope of global output, the rise of developing Asia is doing to the rest of the world something akin to what the discovery of the New World did centuries ago, or at another level what the Industrial Revolution did (in terms of labour productivity vis-a-vis wages). Except that in the digital world of the twenty first century, everything is being telescoped into a very, very compressed time frame. Then again, the rapid expansion of trade in goods and services is permitting a degree of flexibility in the process of geographically heterogeneous expansion that is quite unprecedented. As indeed is the process of integration of finance and capital markets. The technological element which is playing both an enabling and a facilitating role in the process of world integration is another big part of the answer. Finally, notwithstanding the many tensions and hostilities of today, the world is overwhelmingly dominated by a public consciousness opposed to contention over territory or exclusive spheres of influence. Co-operative endeavour at the level of national governments blends rather well, it would seem, with competitive endeavour at the level of the enterprise.

?The writer is economic advisor, Icra